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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: hlpinout who wrote (94125)	12/11/2001 8:49:27 AM
From: Elwood P. Dowd	Respond to of 97611

Merrill on Ingram(largest distributor) by: skeptically 12/11/01 08:41 am Msg: 264051 of 264052 Quarter Tracking Well After a series of checks, we think that Ingram Micro is on track to meet our estimates for the December quarter (4Q01) of $5.95 billion in sales (down 26.2% yr/yr and up 2.0% Q/Q) and EPS of $0.08. Ingram’s outlook, issued on October 30 th , included a rather wide range, calling for revenue between $5.7 billion and $6.2 billion with EPS between $0.04 and $0.10. We believe that when the company issued this outlook, the range was wide because of concerns around the economy and consumer spending. On the margin now, we are feeling better regarding consumer spending this quarter. Ingram could, in fact, deliver results at the higher end of the range, in which case our revenue forecast could prove a little low. Although the company’s sales are heavily weighted to the SMB market, Ingram does have significant exposure to the consumer market. Ingram Micro gets around one-third of its revenues from VARs (who sell into SMB), one-third from corporate resellers (who sell into larger companies), and the remaining third from retail and direct marketers. We would peg total consumer exposure at somewhere around 25% of overall sales. It is our belief that rational pricing in the distribution industry continues to be the rule. This has led to impressive margin stability and augurs well for the future when demand improves. This has also led to remarkably consistent delivery of earnings, another rarity in the current environment. Our checks also suggest that Ingram Micro has not felt any material revenue impact due to confusion around the proposed HP/Compaq merger. We feel that the ultimate outcome of the merger (i.e., whether it occurs or not) will be a virtual non-event for Ingram. Investors who follow our work know that for the past year and a half we have been bullish on Tech Data (TECD $44.68; C-2-2-9) and neutral on Ingram Micro despite being very favorably inclined towards the distribution industry in general. The reason for the difference in our opinion towards these two dominant players in the industry is centered on their respective cost structures. While Ingram’s revenue is roughly 40% higher than that of Tech Data, its operating costs are almost 70% higher. This results in Ingram’s operating expense ratio being 80 basis points higher than Tech Data’s. For us to become more positive on Ingram Micro, we would need to see the company make solid and consistent progress in narrowing this gap. On one hand, this cost delta is significant, but on the other, Ingram has made some progress in improving its cost structure, specifically around body count reductions (3000 since the beginning of 2001) and facilities consolidation (in North America and Europe). It would also not be out of the question, in our opinion, for the company to further reduce its headcount over the next several quarters. We also think that a fair percentage of the cost delta is due to Ingram’s investment in Asia where the company has yet to turn a profit. We think that Ingram can reach break-even in the region sometime in the middle of next year, and the company’s early investments there could provide it with a first-mover advantage. Importantly, if Ingram Micro can close the cost structure gap with Tech Data over a reasonable period of time, this could be a significant EPS driver and a reason for changing our opinion on the stock. For now, TECD remains the better managed company with a lower valuation off of next year’s expected earnings. Ingram’s price/earnings multiple off of next year is roughly 25x versus TECD’s valuation of 17x. We are maintaining our Neutral rating on Ingram Micro shares. We are leaving our forecasts unchanged for this year and next. For next year we are looking for revenue of $25.27 billion (up 1.1%) and EPS of $0.65.

To: hlpinout who wrote (94125)	12/11/2001 9:21:26 AM
From: Elwood P. Dowd	Read Replies (1) \| Respond to of 97611

By Tish Williams Senior Writer 12/11/2001 09:13 AM EST A new sort of guessing game has begun at Hewlett-Packard (HWP:NYSE - news - commentary - research - analysis). H-P and Compaq's (CPQ:NYSE - news - commentary - research - analysis) problems are obvious, but their resolutions are unclear. In the month that leads up to the Hewlett-Packard shareholder meeting and its crucial vote, doubts about both companies' businesses will shape their stock prices. Compaq stock will suffer on fears of continued revenue depletion. And despite an initial rise, Hewlett-Packard's stock will not move solidly to the upside with so many questions about the future of its business segments and its management. The trouble is simple. H-P CEO Carly Fiorina has to scramble to shore up investor approval outside the influential Hewlett and Packard families, now that both have announced their opposition to the Compaq acquisition, as planned. An independent Compaq will have to jump-start the poor revenue that caused an extremely weak third quarter, punctuated by troubles in its core PC business. Also, Fiorina will be faced with the door, should she and shareholders lack common ground on H-P's direction in her second megamerger attempt at the H-P helm. As if that wasn't difficult enough, unknowns unsettle the companies' futures even still. For the past two months, customers haven't known whether Compaq will exist much longer if the merger sneaks through, which influences the decisions of big customers who need service and support. Will Compaq's product lines continue, or won't they? Compaq CEO Michael "Capellas admitted that he thought [Compaq] had lost some business because of the merger," says Morningstar's Joe Beaulieu, adding that Compaq may also have gained some accounts because of its connections with HP. "Uncertainty is a bad thing for Compaq. After all, if customers are planning on making large purchases, it matters if the vendor might not exist in its current form six to nine months down the road." Then again, Beaulieu tempers that assumption with the current IT spending environment. There's not as great a distance to fall, sales-wise, in a difficult market for where "there aren't a lot of customers who have money burning a hole in their pockets," Beaulieu says. He considers H-P shares fairly valued. On that point, the Hewlett family, owners of 5% of H-P, specifically objected to how the Compaq acquisition would weigh more of the H-P business toward the low-end, thin-margin PC. The Street is debating whether investors could be swayed in favor of the pairing if Compaq shed its troubled computer business, a prospect Compaq is familiar with in a year-long PC sales slump. Then again, Bear Stearns' Andrew Neff argues that if H-P has to forge ahead on its own, it too should get out of the PC business because of its low returns. The thought of two computing powerhouses considering their PC exits can't help computer sales in an already tough fourth quarter. Neff considers the PC business $1.50 to $3 of Compaq's per-share price, and $1 to $2 of H-P's stock price. H-P ended Monday trading down 2% to $23, while Compaq fell 14% to $9.70. Neff has a neutral rating on H-P, and Bear Stearns has done banking for the company in the past three years. Life without the PC business would obviously change the much-touted potential of the companies' services business, and further complicate both companies' turnaround efforts, united or separate. Nobody's sure if H-P or Compaq would sacrifice their PC arms for the sake of the merger, or a more profitable business as standalone entities. In the meantime, earnings could suffer. Neff warns his clients that "the confusion and uncertainty of customers will likely have a significant impact on H-P's and Compaq's revenues," adding that his quarterly and 2002 earnings estimates for H-P are "clearly at risk." For the moment, so are several once powerful segments of both companies' businesses.